The S&P 500 index posted a modest weekly gain of about 1% last week, but the surface calm hid a period of intense turbulence beneath.
According to the weekly market brief from Goldman Sachs' Delta One trading desk, the week was marked by multiple extreme events: record volatility in momentum factors, a hawkish stance from the Federal Reserve, the peak of Q2 earnings season, and the largest concentrated hedge fund deleveraging in over three years.
Following the reversal of this deleveraging trend, Goldman Sachs' trading desk recorded its largest net buying since November 2020, driven almost entirely by short covering. Net buying was observed in both macro products and individual stocks.
This deleveraging was the most intense in three years, with pressure building at the start of the week. Goldman Sachs Prime Brokerage data showed that the cumulative deleveraging over three days—from the previous Friday through Tuesday—was the largest since November 2022 for the prime book, and the largest in single-stock deleveraging since March 2025. The momentum factor (GSPRHIMO) fell 7% for the week, driven by long selling in popular AI stocks and short covering in macro products. Goldman Sachs noted that hedge fund flows early in the week exhibited clear capitulation characteristics. From a global perspective, this deleveraging was the largest since the meme stock frenzy in January 2021 and the second largest in the past decade, with short covering outpacing long selling at a ratio of 1.3:1. North America (dominated by short covering) and emerging markets Asia (dominated by long selling) were the regions with the largest deleveraging.
The turning point came Wednesday through Thursday. On Wednesday, the Federal Reserve meeting leaned hawkish, with three members voting for a rate hike and Chair Justin Warsh offering no forward guidance, pushing the 30-year Treasury yield to its highest since 2007. However, the market reversed sharply on Thursday. The S&P 500 rallied 1.67% in a single day, and the Nasdaq 100 surged 3.36%. The momentum factor GSPRHIMO skyrocketed 13% in one day, its largest single-day gain in over a decade. The catalysts came from two directions: Microsoft (MSFT) jumped 15% after beating earnings, with better-than-expected cloud data directly boosting AI trade confidence, and the liquidation pressure from the hedge fund Situational Awareness was alleviated as it transferred its public equity positions to Citadel, removing the overhang of forced selling. On Friday, Amazon (AMZN) reported Q2 results, with AWS revenue up 37% year-over-year and capital expenditure plans raised by $220 billion, sending the stock up 12% and pushing hyperscaler cloud stocks to their largest weekly outperformance relative to the Nasdaq on record.
As deleveraging abruptly reversed, capital quickly returned. Goldman Sachs reported that last week marked the largest net weekly buying of US stocks since November 2020. This net buying was almost entirely driven by short covering, with limited net long buying. Specifically, macro products (indices and ETFs) accounted for 58% of total net buying, with a ratio of short covering to long selling of 3.4:1. Short interest in US-listed ETFs fell for the fourth consecutive week, with a 4.3% decline this week, led by short covering in technology, small-cap, and financial ETFs. Individual stocks accounted for 42% of total net buying, with a ratio of short covering to long buying of 2.1:1. Eight out of 11 sectors recorded net buying, led by information technology, consumer discretionary, financials, and materials, while healthcare, utilities, and consumer staples were the only three sectors with net selling.
In technology, hedge funds were net buyers for the second consecutive week, with the fastest buying pace since December 2022. During the earnings-heavy week, hedge funds made net purchases of US information technology stocks for a second week, with the buying speed being the fastest since December 2022. This was driven by a combination of long buying and short covering. Sub-sectors with the most net buying included software, semiconductors and equipment, and technology hardware. The "Mag 7" stocks recorded net buying for four consecutive trading days, with current net allocation at about 16%, in the 12th percentile of the past year. Notably, the US materials sector stood out with its largest net buying in four months, ranking in the 98th percentile over a five-year lookback, driven almost entirely by long buying. Chemicals, construction materials, and containers and packaging sub-sectors led the gains. The sector's current gross and net allocations are 3.2% and 2.5% of total US net market value, respectively.
With the influx of net buying, hedge fund leverage rose simultaneously. Vincent Lin of Goldman Sachs Prime Brokerage noted that total leverage for US long-short equity funds increased by 3.9 percentage points to 208.1%, and net leverage rose by 1.1 percentage points to 52.8%. Absolute levels remain in historically low territory, suggesting there is still room for further re-leveraging, but also indicating that this rebound is not built on a high-leverage foundation.
Looking ahead, the trading desk at Goldman Sachs indicated that for investors to give a definitive "all-clear" signal, momentum factor volatility needs to stabilize first. Meanwhile, the desk has received inquiries from investors on how to reposition technology and AI trades. Mentioned directions include storage chip companies WDC and STX, analog semiconductor firms ADI and TXN, and hyperscaler cloud providers, especially AMZN and MSFT. However, Goldman Sachs also highlighted a potential "grey swan" risk: the collapse of Situational Awareness may be just the beginning, as there are many hedge funds holding highly leveraged long positions in chip stocks through total return swaps, with estimated positions exceeding $100 billion. A further decline in the stock market would inevitably trigger more forced liquidations and position transfers.